Our thoughts . . . 09-12-09
LOCATION, LOCATION, LOCATION?
For this month at least, there is a feeling that the residential real estate market may be starting to recover. While prices may be down from historic highs, agents tell me that sales are up. (Maybe $8000 in tax credit has something to do with that!) In the Real Estate market, a large factor in the purchase price depends on location since buildings can’t be easily moved and location influences lifestyle. Sales data will confirm the common sense assumption that quality homes with above-average curb appeal in good neighborhoods will sell for more than run down houses in bad neighborhoods. Conversely though, if we compare Midwest locations, two nearly identical houses in similar neighborhoods might sell for about the same price regardless of which city or town they are located. Except for specialty locations like lakes or golf courses, construction costs are going to be about the same whether the house is in Milwaukee, the suburbs of Indianapolis or in a small town like Chillicothe, Missouri. Location--more than price--continues to be the most important factor in housing as we choose to live where we want so that we can live how we want.
What does all this have to do with dental practices? Frankly, not much--and that’s the point. I’ll share a big secret with you a little later but consider that location might not be as important as you think. Of all methods of valuation used by appraisers, only the summation of assets and comparable sales methods directly consider location as any factor. Revenue, profitability and the quality of the patient base are far more important to the value of the practice.
Unlike housing, there is no such thing as two identical dental practices and consequently it is hard to directly compare values. Any analogy between housing and practice locations is also dangerous because while living in a new development may be a great thing, the dream of a practice on the leading edge of that development may be flawed. Remember, the definition of a pioneer is a guy lying face down in the sand with an arrow in his back. There are only so many places to pitch a tent in a new area. In contrast, an older office in an established neighborhood could be a bonanza. In our business, we are witness to the agonizing decision about
"where to go". There always seems to be pressure to find the "perfect" practice in the
"perfect" location. The cost of education (including the four year delay in starting full-time employment), practice acquisition costs and the desire to improve one’s standard of living do indeed make this an important decision. I’ll soon reveal that important secret but I’ve noticed that this search always seems to center on location. While location and its attached lifestyle is an important consideration, let’s not overlook economic opportunity because, and here is the big reveal: YOU ARE NOT GOING TO END UP WHERE YOU START! The list of doctors who are retiring from the same office from which they first hung out their shingle would have to be very, very short. It turns out that almost everyone changes locations at least once during their career and you are likely to be no exception. It’s not very likely that this is going to be a once in a lifetime decision. If we agree to accept this as fact (albeit begrudgingly), then what factors might better be included in your search criteria? We’ll take a look at the physical and financial factors that should be at the top of your list in our next posting. Steve Wolff, DDS
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